The United Kingdom sits at the centre of the world’s most far-reaching network of tax havens, even as David Cameron, the British prime minister, sets his sights on “galvanising international action on tax evasion” at this week’s G8 summit.
Cameron, drawing on populist anger at corporate tax avoidance, hopes to emerge from the Northern Ireland meeting of the leaders of the world’s largest economies with an agreement that would open up the ownership of hundreds of thousands of offshore companies to scrutiny for the first time.
Tentative estimates of the amount of money concealed from tax authorities via companies and other offshore structures run into many trillions of dollars.
Yet the UK itself is the main beneficiary and architect of the current system, controlling a globe-spanning offshore empire of semi-detached islands and colonial anachronisms that pour billions of dollars in “hot money” into the City of London, one of the world’s most powerful financial centres.
Aid charity ActionAid says the UK controls one-fifth of the world’s tax havens and accounts for about one-third of the global market in offshore services.
Nicholas Shaxson, author of “Treasure Islands: Tax Havens and the Men Who Stole the World”, told Al Jazeera the UK was the single-most important player in offshore finance.
A ‘spider’s web’
He described the network as a spider’s web, with London linked in near proximity to the crown dependencies of Jersey, Guernsey and the Isle of Man, all traditional bastions of secrecy and minimal taxation.
Beyond that come the British overseas territories, including the Cayman Islands, one of the world’s most prolific offshore centres; the British Virgin Islands, home to more than one million registered companies; and Bermuda, a bolt-hole for the insurance industry alleged to hold combined assets exceeding $450bn.
A further tier includes Commonwealth nations such as Nauru and the Maldives and other lightly regulated territories with British ties such as Hong Kong.
Yet much of the network’s influence derives from the financial muscle and peculiar status of the City of London itself, a medieval statelet that predates the formation of the modern British state and uses rights and privileges dating back to the 11th century to protect its interests.
“It is very influential and hugely important, yet hiding in plain sight, and I’m still mystified by how large it looms in this whole battle,” said Shaxson.
By some measures too, the UK can be considered a tax haven in its own right. Much of the legal architecture that supports financial secrecy is rooted in English common law, while London financiers were responsible for developing many of the pioneering practices that created the modern offshore industry.
And while British governments once attempted – with little success – to rein in the power of the City, Shaxson said recent governments had been more compliant, with Cameron passing legislation in 2011 exempting UK-based corporations from tax on overseas earnings.
British companies are also prolific users of tax havens, with ActionAid research revealing that 98 of 100 companies on the FTSE 100 index operated offshore subsidiaries.
“There is a general unwillingness to tax corporations and a general go-easy-on-them attitude, dating from the days of Tony Blair,” said Shaxson.
“HMRC [the UK’s tax collecting body] really changed its focus from being an organisation that goes after corporations to collect the tax it is owed to an organisation determined to have an easy relationship with big business.”
Cameron on Saturday announced that leaders of 10 territories and dependencies, including the Cayman Islands, the British Virgin Islands and Jersey, had agreed to sign up to the Organisation for Economic Co-operation and Development (OECD)’s multilateral convention on information exchange, which commits signatories to greater transparency in corporate ownership.
“It is important we are getting our house in order,” said Cameron. “It is a very positive step forward and it means that Britain’s voice in the G8, and campaigning on this issue around the world for proper taxes, proper companies, proper laws … will be stronger.”
In a joint statement, the leaders of the territories said: “We are committed to continuing to play a leading role in delivering a responsible and effectively regulated global business environment and in tackling the global problem of tax evasion.”
Many countries traditionally considered tax havens have already jumped to meet tougher standards on transparency. Last month 13 countries including Luxembourg, Austria and Singapore signed the OECD convention.
Naming and shaming
In 2009, the G20 tasked the OECD with naming and shaming tax havens by drawing up lists of territories falling short of international standards on transparency based on the number of agreements to share financial information they had signed.
Yet within days a black list was empty as tax havens scrambled to sign the minimum number of treaties necessary for inclusion on the white list. By 2012, a grey list contained just two names: the Pacific islands of Nauru and Nieu.
John Christensen of the Tax Justice Network told Al Jazeera the basic flaw with current efforts was that they did not go far enough. He cited offshore trusts as an example of how money could still be hidden out of sight.
“Offshore trusts are the basic building blocks from which you start to build a tax evasion structure. The trust will open an offshore company in a different jurisdiction, which in turn will open up another company, and that way you make yourself literally investigation-proof. Trillions of dollars are held in them and nobody knows a thing about them.”
Christensen said the British government had the power to do more to curb the activities of its overseas possessions if it had the will.
While all the territories practice self-rule, he said London was ultimately responsible for their governance under international law.
“The UK has a greater opportunity than any other state to tackle this because so many tax havens fly the Union flag,” said Christensen. “If Cameron wanted to pursue this, he could achieve more in a couple of years than has been achieved in the past half century.”
Tax havens have been under increasing pressure since the 2007 financial crisis, with many national economies plunged into ruin even as corporations and the super-rich stashed their wealth beyond governments’ reach.
Mike Lewis, ActionAid’s tax justice policy adviser, told Al Jazeera the world’s poorest nations were the main victims of offshore finance, with almost half of all investment to the developing world channelled through tax havens, resulting in multi-billion dollar tax losses.
“Tax havens are one of the main obstacles in the fight against global poverty. Their secrecy and harmful tax regimes leach money that could be used to end hunger and provide hospitals, schools and clean water,” said Lewis.
Shaxson takes heart from growing public awareness of corporate tax affairs, with companies including Google, Apple, Amazon and Starbucks incurring popular wrath and political censure over their tax arrangements.
“You are a company that says you do no evil. And I think that you do do evil,” Margaret Hodge, the chair of the UK’s public accounts committee, told a Google executive summoned to explain the company’s payment of just $16m in taxes on $18bn in UK revenue.
“For the first time in history you have pressure from the street and that’s never happened before,” said Shaxson. “On the other hand, you have the old vested interests pushing darkly and secretly in the opposite direction. This is a long battle but we do have public attention on this issue for the first time and that, I think, in the long term, will reap real significance.”
This article was originally published on Al Jazeera on 16 June, 2013